Gloucester Publications Ltd. v. France Editions ET Publications S.A.

IN THE COURT OF APPEAL

1994, No. 149
(Civil)

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J U D G M E N T

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Godfrey, J.A.:

1. This is an appeal from an order of Rogers, J., made on 11 July 1994, awarding damages (to be assessed) to the plaintiff in the action Gloucester Publications Ltd. ("GPL") against the defendant France Editions et Publications S.A. ("FEP"). FEP now appeals against the judge's order.

2. The material facts may be shortly stated.

3. FEP is the publisher of a magazine called "Elle". In 1987 it entered into arrangements with GPL for the production here of a regional edition of the magazine. FEP and GPL set up a company, eventually called International Magazines Limited ("IML"), to carry those arrangements into execution. As part of the arrangements, FEP granted IML a licence to use its trade-mark "Elle" in connection with the magazine's regional edition. This licence contained a provision the effect of which was to entitle FEP to terminate IML's licence if "the number of copies of the magazine sold or distributed at full market price does not exceed 3,000 in respect of 3 successive issues". On 5 March 1991 FEP purported to determine IML's licence on the ground that the number of copies of the magazine sold or distributed at full market price for the months of July, August and September 1990 fell short of 3,000.

4. If FEP was not entitled to terminate IML's licence then its act purporting to do so clearly evinced an intention no longer to be bound by its contractual arrangements with GPL. It is true that, under certain conditions, it would have been possible for those contractual arrangements to have limped on for a time, notwithstanding the termination of the licence, as Mr. Clayton, for FEP, pointed out. But I cannot see that this makes any difference. The termination of IML's licence to use the name "Elle" went to the root of the arrangements between FEP and GPL and plainly amounted to a repudiation by FEP of the contract between them. If the termination was wrongful, it constituted a breach of the contract between FEP and GPL for which GPL is entitled (as the judge found) to claim damages from FEP. (There was some debate before the judge and before this court as to the nature of GPL's pleaded case, based as it was on an alleged implied term of the contract between FEP and GPL that FEP would not wrongfully terminate IML's licence; but for my part, I think it sufficient to say that the act of FEP in terminating IML's licence, if wrongful, plainly amounted to a repudiation of FEP's contract with GPL and that further legal analysis of the situation need not be attempted.)

5. The substantive issue, then, is whether FEP was or was not entitled to terminate (as it did) IML's licence to use the name "Elle". This requires the court to decide a short point of construction, i.e. the meaning of the phrase "sold or distributed at full market price". As I will explain in a moment, FEP argues for a narrow construction of this phrase and if FEP's construction is correct, it was clearly entitled, in the events which happened, to terminate IML's licence. GPL, on the other hand, argues for a wider construction of the phrase and if GPL's construction is correct, it is equally clear that FEP was not entitled to terminate IML's licence.

6. The question for this court, then is whether FEP's narrow construction, or GPL's wider construction, of the phrase in question is to be preferred. The judge preferred GPL's wider construction. Was he right?

7. I begin my answer to this question by recording that the judge's approach to the question was plainly correct. The provision which he had to construe was susceptible of more than one interpretation. It falls to be construed, not in the abstract, but in the light of the circumstances as they were when the parties entered into their contract and in which the phrase falls to be applied. Evidence was therefore admissible, and was properly received by the judge, to show what the circumstances were which the parties must be taken to have had in view when entering into their contract; and it was necessary and right for the judge to bear these circumstances in mind in construing the contract, the relevant circumstances here being the circumstances of the local magazine publishing business.

8. If any authority for the propriety of this approach be required, it is to be found in Charrington & Co. Limited v. Wooder [1913] AC 71, see especially per Viscount Haldane L.C. at p. 79. (I would add in parenthesis that in the same case, in which the term "market price" fell to be construed by the court, Lord Atkinson pointed out at p. 91 that the term "market price" was not a term of art; and in my judgment it follows that the phrase which we have to construe here must be given not a literal but a purposive and sensible construction, being the construction best reflecting what must be taken to have been the intention of the parties when entering into their commercial arrangements.)

9. FEP says (as I understand its argument) that by "full market price" the parties meant and meant only the cover price of the magazine, i.e. the price shown on the magazine itself as the purchase price of a single copy. That has the merit of simplicity; but it will not do. The reason is that in the circumstances of the local magazine publishing business, a number of sales of magazines are not single copy sales at all but are sales to subscribers at discounted prices offered by the publisher to such subscribers. The present case was no exception. It is common ground that sales of "Elle" here were made not only at the cover price shown on the magazine but also to subscribers (some of them on outdated applications, but in my judgment nothing turns on this) at discounted prices. FEP concedes that sales to subscribers, although at a discount to the cover price, cannot be excluded from the calculation to be made in order to ascertain whether, in any particular month, 3,000 copies of the magazine were or were not "sold or distributed at full market price". This inevitable concession demonstrates that there can be more than one "market price" and that an elastic construction must be placed on the phrase which falls to be construed. So the question becomes "How far does the elastic stretch?"

10. GPL says (as I understand its argument) that the elastic stretches far enough to cover all sales in the ordinary course of business in the various "markets" in which the magazine is sold. There is not, says GPL, one unitary "market", as the argument for FEP assumes, but a number of different "markets" and accordingly a number of "markets" in which the "full market price" may differ from market to market. In the case, for example, of a bulk purchaser of the magazine (such as an advertiser who wishes to buy a number of copies of the magazine for promotional purposes of his own) a sale to him at a discount would not be excluded from the calculation to be made, so long as that sale was one made in the ordinary course of business and the discount offered to the purchaser was no less than the ordinary discount offered for such a sale. GPL, I think, accepts or must accept that the calculation cannot include "sales" of the magazine such as "sales" of copies returned as unsold by distributors; or sales of remaindered copies as a job lot; because such "sales" would be outside the ordinary course of business. But sales at different prices in different "markets" are not to be excluded simply on that ground alone.

11. As between the rival constructions, the court in deciding which to prefer must look to what the parties must be taken to have intended, when they entered into these arrangements in 1987, in the light of the circumstances of the magazine publishing business as known to them at that time. They must also be taken to have intended that their arrangement would be certain and sensible. Nobody has suggested that the phrase which we have to construe is so uncertain that no effect can be given to it at all and so we are concerned only to see which of the competing constructions is most appropriate to the circumstances in which the contracting parties found themselves in 1987 and the object which they were seeking to achieve. The object seems to me to be perfectly plain. If the number of sales of the magazine fell short of the precise figure selected by the parties for the purpose, then the commercial viability of the venture would be called into question, and it would be sensible that FEP should then have the right to determine IML's licence to print and distribute the magazine.

12. The figure of 3,000 is a precise figure. No matter whether one prefers the construction offered by FEP on the one hand or by GPL on the other hand, difficulties are likely to arise as indeed they have. I do not find it possible to say that one construction would be more easy to operate than the other.

13. I have not found it easy to choose between the two but, in the end, I have come to the conclusion that the construction suggested by GPL does have to be preferred, and accordingly I agree with the judge, who was of the same opinion. There was not, I believe, any attempt by the parties to identify one unitary "market" for the purposes of the operation of this clause. Looking at the matter in the round, the parties were, I think, looking to see what genuine sales, if I may put it that way, were being made of the magazine in order to ascertain how the venture was going. What was intended to be excluded, I have no doubt, were artificial or unreal "sales" which would offer no proper guide as to the viability of the venture. The narrow construction suggested by FEP is more attractive if the question is approached literally, but the court is here to do its best to interpret the intentions of commercial men who from time to time are notoriously unable to give a precise meaning to a phrase which each of them thinks he understands but which gives rise to difficulties when borderline cases subsequently arise. This is a typical example. The best the court can do here, in my judgment, is to conclude that the parties must have been intending, in the circumstances in which they found themselves, to be looking at sales falling within the wider construction offered by GPL. This would, for example, bring in rather than exclude the sales to advertisers at a discount to the cover price in making the calculation which has to be made for the purposes of the termination provision.

14. A special case is the sales made to an organization called Peace Books. These sales were sales of returned back issues and of an unusual character. They were described by the judge in the following terms:

"What happened there was that after the magazines had been out for distribution in Hong Kong, they were returned and they were sold in bulk to Peace Books, who would consolidate them with a large number of other magazines in a container and eventually they would use them for shipment up to China. There did not seem to be very much urgency in getting the magazines to China and they would arrive there months if not longer after the magazines were published. The difference in distribution via Peace Books was this that Peace Books paid a very much reduced set price for the magazines and Peace Books were unable to return the magazines as were the Hong Kong distributors if the magazines remained unsold. The price at which the magazines were sold to Peace Books and the fact they were sold much later than the original publication date seems to me to show clearly that those were the sort of sales which were intended to be excluded by this phrase "sold or distributed full market price" and I therefore exclude those."

15. I have to say that for my part I entirely agree with the judge. It does seem to me that the parties ought not to be taken as having contemplated in 1987, these exceptional transactions involving Peace Books. I, for my part, would exclude the Peace Books sales from the sales from the relevant calculations, as did the judge: they are quite useless as a measure of the ongoing viability of the venture. However, it does not matter; because, for the reasons I have given, preferring, as I do, GPL's wider construction, it is the case (as the judge held) that FEP were not entitled to terminate IML's licence as they purported to do, because there was not, for the three relevant months, sales which fell short in any case of 3,000 copies. FEP, therefore wrongfully repudiated its contract with GPL.

16. For the reasons which I have endeavoured to state, I would dismiss this appeal and affirm the judge's order awarding GPL damages to be assessed.

Mortimer, J.A.:

17. I, also, would dismiss this appeal and I agree with the conclusions expressed by Godfrey J.A. as to the meaning of the words in dispute.

18. It may be that the real difficulty in this case is not the meaning of the words themselves but their application to the particular circumstances of a particular sale. It seems to me that sales in the ordinary course of business - without some special circumstances - will prima facie be sales at full market price because it is in the commercial interests of those who sell to obtain such a price. No one can possibly envisage all the relevant circumstances which may arise in a market.

19. Turning to the particular circumstances here, I find myself not able to agree with either the judge or Godfrey J.A. that the sales to Peace Books were not at full market price. Perhaps that demonstrates the difficulty of applying the words themselves. For my part, I think it impossible to distinguish between the sales to Peace Books and the other sales made in the ordinary course of the business of the publisher. I may say, at first my view was firmly that those sales came into the category of the dumping of useless stock, but I am persuaded by the arguments and the evidence that was not so. These sales were in the ordinary course of business. They were sales to China which was within the area licensed in the licence agreement. The price, although it was much lower and the discount much greater than in other transactions, is easily accounted for by the facts that there were to be no returns; that there was a regular order of a substantial number of copies - 500 - and that the sales are designed for the market in China. So for my part, I think that those sales are within the words and are therefore to be counted towards the 3000 total.

20. There is just one other matter I would mention. There is a sale contended for inclusion by Mr Yu for the plaintiff's of 50 copies made in March 1991 - after the termination of the licence. That was some five months after the date of the issue of those magazines in September 1990. In order to give any sensible effect to the words and the termination clause, a reasonable time must be imposed. I have no doubt that five months for the total of 3000 to be achieved was beyond what is reasonable and I would not include them.

21. As to the submission by Mr Yu in the respondent's notice that all the copies distributed to suppliers and returned to the publisher should be also included because of the word "distributed" in the clause, I find myself implacably against him. This clause is designed to deal with sales and I have no doubt that the word "distributed" was included because there was distribution before the "sale or return" situation had been finalised. Those which were returned cannot come within the clause.

22. That is sufficient to determine this appeal subject to the submissions made by Mr Clayton - dealt with by Godfrey J.A. - that on a detailed legal analysis of the situation, the plaintiff's cannot establish liability. His argument is that the termination of the licence had not been accepted by the joint-venture company and was ineffective in law. The termination he says was "writ in water". There may be different views as to the proper legal analysis of what took place. The plaintiff's contended for the implied term alleged in s.7 of the statement of claim. The judge accepted this and held the defendants liable for a breach of the joint-venture agreement. The letter of 5th March, in my judgment, shows a clear determination to bury the whole joint- venture. If there is any doubt, it is resolved by the fact that the defendants themselves published "Elle" - in its Chinese version - in April 1991, the very next month. So far as I am concerned, there may be differences as to the legal analysis but the fact remains that the defendants were determined to put an end to this joint-venture agreement. For my part, I am not prepared to say, nor able to say, that the judge was wrong in accepting that this was a breach of the implied term contended for.

Litton, J.A.:

23. This appeal raises two main points: (1) whether the judge was right in concluding that the appellants, FEP, were in breach of contract in purporting to terminate the licence agreement dated 1 August 1987 and (2) if the answer to the first point is Yes, whether the judge correctly concluded that such breach sounded in damages.

Breach of contract

24. The first point turns on the proper construction of clause 9.3(c) of the Licence Agreement. The crucial words in clause 9.3(c) are "sold or distributed at full market price". These words must be construed against the background of facts known to both parties at the time of contracting. The relevant facts are:

(1) A publisher rarely sells magazines at the cover price.

(2) The magazines would be sold to subscribers at a discount from the cover price.

(3) The magazine would be sold by the publisher through distributors who in turn would distribute the magazine to a number of outlets: news-stands, airlines, hotels, etc. Plainly the price charged to the distributors would be at a substantial discount to the cover price.

(4) The publisher would make bulk sales at a discount: the higher the numbers ordered, the greater the discount from the cover price.

"Full market price"

25. Mr Clayton does not, as I understand him, dispute these facts. What he says is this. The bulk of magazines distributed through distributors would in fact end up on news-stands and would be sold to the public at the cover price. That was what the parties meant by "full market price". The only other "market" contemplated was that reached through subscriptions, and in respect of subscriptions the full price was written on the cover of the magazine as well. The inclusion of subscriptions at a discount to the cover price, Mr Clayton concedes, might stretch the definition of "full market price" a bit; but that is all. Nothing else, he says, comes within the expression "full market price". There was, as he argues, in truth only one market.

26. Mr Clayton submits that the parties must be deemed to have intended to give practical effect to their own contract; his construction of clause 9.3(c) has the virtue of simplicity.

27. The matter can be tested in this way. In relation to the 980 copies of the September 1990 issue sold to distributors the appellants accept that they were sales at full market price irrespective of whether they in fact ended up at the news-stands, where they would have been bought at the cover price, or, exceptionally, in a hotel room where the reader would not have had to pay anything at all. The parties, Mr Clayton says, would have looked at the matter broadly. They could not have contemplated, in considering the application of clause 9.3(c), a microscopic examination of the facts surrounding each copy; and if one or two magazines slipped through the net, so be it.

28. This argument, in my judgment, is attractive. It does not however deal with the situation, as my Lord Godfrey JA has pointed out, where the publisher makes bulk sales at a discount direct from the office; nor does it deal with the market which, on the evidence, undoubtedly exists (and presumably existed in August 1987) in old issues. These are sold to distributors at a very heavy discount from the cover price for eventual distribution in the PRC. These are outright sales with no possibility of return if unsold.

29. Is Mr Clayton's argument for a clear-cut but restricted meaning of clause 9.3(c) correct? The matter can be testified by what actually occurred. In relation to bulk sales effected through the office, 84 copies of the September issue were sold to three advertisers at a 15% discount. This was according to a fixed tariff of discount set by the publisher. The tariff was on a sliding scale with 15% off for purchaser of 10 to 50 copies, going up to 40% for over 400 copies. Were these sales "at full market price"? On Mr Clayton's argument they plainly were not.

30. The judge concluded that they were. He said they were at "the market price for bulk purchase" and the advertisers were "buying the current magazine at the full price and they got a discount for the bulk purchase but no more than that". In my view, the judge was plainly correct in his view. Once we reach this point in the analysis of clause 9.3(c) it can be seen that the narrow "black letter approach" to the construction of that clause must be wrong. The 84 copies of the September 1990 issue sold to the advertisers at a discount of 15% from the cover price clearly came within clause 9.3(c) and the judge was right in so holding.

The Peace Book Company sales

31. The next question then arises: were the sales to Peace Book Company of the back issues also within the clause? The judge said No, because the issues of the magazine were stale and because they were sold at a heavy discount from the cover price. I cannot see why those sales were not likewise within the expression "full market price" in clause 9.3(c). It is not suggested that there was no real market for such back copies of ELLE magazine nor that the price charged by the publisher to Peace Book Company was not a genuine market price. It was an arms-length commercial transaction. Unless "full market price" was intended by the parties to mean "full cover price" - thus excluding discounted subscriptions as well - it seems to me that the back issues sold to Peace Book Company must come within clause 9.3(c) as well. In this regard, I concur with the view expressed by Mortimer, JA.

The peripheral points

32. What I have said above is enough to dispose of the first point in this appeal but for the sake of completeness, I would simply state my conclusions on the peripheral points which have been argued. They are as follows:

(1) In my judgment the trial judge was correct in concluding that the unsold copies returned by the distributors did not come within clause 9.3(c). I concur with Mortimer, JA in this regard.

(2) The 31 subscribers who received their September 1990 issues based on the price stated in the old subscription forms plainly came within clause 9.3(c). The judge was right in his conclusion.

(3) The 50 copies of the magazine sold after the notice of 5 March 1991 must be excluded from the calculation. I concur with Mortimer JA in this regard.

Liability for damages

33. It is a general proposition of the common law that where a party is in breach of his contractual obligations this gives rise to a secondary obligation imposed by law to pay damages to the other party. Here, on 5 March 1991, when FEP gave notice to the joint-venture company IML of the termination of the licence agreement, they also wrote to GPL stating that the company must cease all "preparation, production, printing and distribution of ELLE magazine within immediate effect". In practical terms, they were putting an end to the joint venture between the parties: a joint-venture which plainly required the input of effort from both parties. If the notice of termination was unlawful, how could the repudiation of the joint-venture by FEP not prima facie be an actionable wrong sounding in damages? The only possible answer, as far as I can see it, lies in clause 14.03 of the Deed of Joint-venture. Clause 14.03 makes provisions for GPL to serve notice on FEP if GPL considered that FEP was in breach of obligation under the deed, requiring FEP to remedy such breach within 30 days. This clause does not, in terms, exclude the remedy of damages if FEP should wrongfully repudiate its obligations. Has this clause, then, the effect in law of excluding the remedy of damages? The answer my judgment is plainly No. Clause 14.03 is set in the context of the continuation of the joint-venture, not its repudiation by one of the parties. In the circumstances of this case, it would have been bizarre for GPL, on receipt of the 5 March notice, to have served a counter - notice under clause 14.03: by the time such counter-notice expired, that is, 30 days from 5 March, the April issue of ELLE magazine would have been out on the streets. This April issue of the magazine was, on the evidence, produced by FEP without the participation of GPL or the joint-venture company IML.

34. In my judgment, the judge was right to conclude that FEP is liable to pay damages. Like my Lord, Godfrey JA, I am not deterred in this conclusion by the way GPL's case is pleaded. Order 18 r7 of the Rules of Supreme Court do not require legal propositions to be pleaded. The statement of claim contains all the necessary averments of material fact to give rise to a claim for damages.

35. In dismissing this appeal I would commend the efforts of counsel on both sides, Mr Clayton and Mr Yu, who have presented their arguments cogently and effectively. Some of the questions from the Bench may have appeared hostile but they were calculated to probe the propositions advanced. For my part I must confess that my mind has hovered on a fine balance for some time as regards the first point; but then, construction points are never really easy. The art of drawing up contracts requires great skill. However a skilful draftsman may be, there are usually turns of event not wholly catered for by the contract. The draftsman in this case is not to be criticised if clause 9.3(c) were thought not to have been crystal clear. Indeed, on the view I have formed of case, it is clear enough. This appeal is dismissed.